A Critical Look at Investing and Saving Money

By Samuel Ighoyota Akporhiunuvwiyo

The concept of investing is one which has been misunderstood over the years. Many people confuse investing money with saving money. Although they are used interchangeably, they are totally different.

There is a huge difference between investing and saving. The former entails building wealth gradually over an extended period of time through the purchase and holding of investment and financial tools like stocks, bonds, real estate and others, with the hope of getting more money from these tools.

On the other hand, saving is basically setting aside the money you don’t want to spend now for emergencies or for a future purchase.

There are various forms of investments, but I will narrow this lecture to what we are used to, what we do every day ignorantly.

Everyone has a bank account and this secret I am unveiling to you, most of my commercial banking friends won’t be happy about but we just have to.

Let’s say Emeka saved N100,000 in his savings account with any of the commercial banks for a year. At the end of the year, the interest the money will generate will be eroded by deductions such as bank charges, ATM maintenance fees, etc. The biggest one is inflation, which many people don’t pay attention to.

In about a year, the value of the money would have been depleted to like N80,000, when the inflation rate, which is currently at 12.5 per cent, is factored into it.

So, you are actually losing money by saving that money in a commercial bank, while the bank is gaining.

In fact, Zenith Bank made a pre-tax profit of N58.7 billion in the first quarter of 2020 alone. How do they make their money? What drives their profit margin? Why will the government delay the payment of salaries? Those monies deducted from our salaries as pension, how is the PFA making their profits from these commercial banks, which gather our deposits and invest them in the capital market that guarantees greater returns, including investments in treasury bills, bonds, stocks and others.

So, that N100,000 Emeka deposited can be used to purchase treasury bills, shares, bonds and mutual funds. In summary, it can be used to build a portfolio. A good portfolio can give you a return of more than 20 per cent per annum.

However, there is a level of risk involved; the higher the risk the higher the return. That’s why I used a fair return of 20 per cent.

At the end of the year, Emeka can get more than N120,000. This is because some shares bought with the funds may pay dividends.

What I am saying, in essence, is that keeping your money in a commercial bank is not that bad, but you have to find a way of making some investments too.

Why do we Hold Money?

We hold money for 3 reasons

Transactionary reason: this is for our daily expenses; you can keep this money in a commercial bank.
Precautionary reason: this is keeping money to cater for unforeseen expenses like sickness or unplanned celebration; you can keep this with an investment bank
Speculative reason: to take advantage of business opportunities. Keep this with an investment bank.

Samuel Ighoyota Akporhiunuvwiyo is an Investment Banker